{"id":6150,"date":"2017-09-20T02:21:26","date_gmt":"2017-09-20T00:21:26","guid":{"rendered":"https:\/\/www.alavise.com\/?p=6150"},"modified":"2022-01-02T13:45:01","modified_gmt":"2022-01-02T11:45:01","slug":"current-sp500-level-anticipates-real-gdp-growth-17-years","status":"publish","type":"post","link":"https:\/\/alavise.com\/en\/current-sp500-level-anticipates-real-gdp-growth-17-years\/","title":{"rendered":"Current S&P500 level anticipates real GDP growth by 17 years"},"content":{"rendered":"

This article has been initially published for <\/em>french speaking swiss economic magazine Bilan.<\/em><\/a><\/p>\n

Does anyone understand why S&P500 is reaching these levels while World GDP is growing much slower?<\/p>\n

While discussing with a bullish trader, I asked the question and the answer was, “economy is growing, so is S&P”.<\/p>\n

Fine, but let’s compare the growths we are talking about.<\/p>\n

It is fair to assume that S&P500 is fueled by global economy, as the companies composing the index are mostly globalized for revenues and costs.<\/p>\n

The S&P500 is an average of 500 large US companies.<\/p>\n

Some may grow faster than others. But on average, the index should more or less follow global growth.<\/p>\n

Therefore, it is reasonable and makes sense to compare S&P500 growth with World GDP growth[1].<\/p>\n

I created this graph starting at the S&P500 level of 247 at the beginning of 1988 (source Yahoo! Finance<\/a>). The Orange line shows actual S&P500 value. The blue line starts at same 247 level and grows at the real rate of World GDP (source: World Bank<\/a>)[2].<\/p>\n

We may admit that there is growth anticipation in companies stock value. Trump promises are part of it. Let’s have a closer look.<\/p>\n

5% is the average global GDP growth since 1988.<\/p>\n

Assuming a 5% average annual growth from now on, World GDP would reach the current S&P500 level in… 2034.<\/strong><\/p>\n

This is 17 years anticipation!<\/strong><\/em><\/p><\/blockquote>\n

Of course we can explain this by low interest rates, massive injection of liquidity into the system, credit leverage, financial industry which nurtures itself and, more recently, Trump trade.<\/p>\n

But credits need to be reimbursed at some point, and behind financial industry you have real companies with a stock value that should represent intrinsic companies value, therefore their profit and growth, therefore real world GDP.<\/p>\n

We can anticipate a bit (because of credit and optimism), but 17 years?<\/p>\n

How much is enough?<\/p>\n

The graph shows GDP and S&P started to diverge in 1995.<\/p>\n

Could anyone recall what happened in year 1995 or just before, because it seems there is a crucial trigger there?<\/p>\n

For sure, this is during 1990s that the process of deregulation was finalized in most countries.<\/p>\n

When Internet bubble burst in 2000, the anticipation was 24 years. In 2007, when subprime collapsed, anticipation was 17 years.<\/p>\n

By the end of 2008, real world and stocks were abruptly, but perfectly, re-aligned.<\/p>\n

Quantitative Easing was introduced to support real economy and clearly fueled financial markets divergence again. Until when?<\/p>\n

These questions are important and not just for traders or people anxious to manage their retirement capital, because with each financial crash, the real economy also suffers, severely.<\/p>\n

I always welcome your feed-back.<\/p>\n

__________________<\/p>\n[1] Even for companies in the S&P that would focus on the US Market (any?), World GDP is still a good benchmark, as World GDP growth is aligned with US GDP growth (not surprisingly for a global economy).<\/p>\n[2] Calculation sheet<\/a><\/p>\n

<\/p>","protected":false},"excerpt":{"rendered":"

This article has been initially published for french speaking swiss economic magazine Bilan. 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